Defense
rewarded contractors despite poor performance

The
Government Accountability Office reported that the Defense Department paid
contractors about $8 billion in award fees despite the fact that their
performance often did not warrant such rewards.

Award fees,
which are supposed to compensate contractors for outstanding performance, are
used frequently by Defense and civilian agencies. The report (GAO-06-66) found, however,
that Defense gave awards to contractors for mediocre and even poor performance.

For example,
a contract for a Comanche reconnaissance attack helicopter was delayed for 33
months and cost $3.7 billion more than originally planned, yet the contractor
was paid $202.5 million in award fees, GAO said. In another example, a
space-based infrared system increased in cost by $3.7 billion, or 99.5 percent
of expected costs, and was delayed by more than 12 months. The contractor
received an award fee of $160.4 million.

"The
power of monetary incentives to motivate excellent contractor performance and
improve acquisition outcomes is diluted by the way DoD structures and
implements incentives," the report stated. It examined 93 award fee
contracts in place from fiscal 1999 to 2003.

GAO
attributed the problem to employees' failure to assess how well contractors are
performing. Instead of looking at contract outcomes, contract managers focused
on other factors such as how responsive contractors were to feedback from
Defense officials.

The report
recommended that the undersecretary of Defense for acquisition, technology and
logistics check that contractors are only paid awards for excellent
performance. It also recommended that the under secretary provide more guidance
on award fees. Defense generally agreed with the recommendations.

Award fees
have generated controversy because it is unclear whether they actually elicit
outstanding performance. In May, industry experts told an acquisition panel
that performance-based contracting suffers from poor
implementation. There are no governmentwide
rules on how award fees and performance-based contracts should be
implemented.

At the same
time, many consultants and industry groups advocate the
increased use of performance-based contracting because they say it improves
outcomes. The Office of Management and Budget encourages the use
of the technique and has directed acquisition officials to apply it on 40
percent of eligible contracts for services valued over $25,000.

The GAO
report comes on the heels of a Defense acquisition panel recommending an overhaul of the
Defense acquisition system.